China shadow banks threatened with default

SHANGHAI — Six Chinese trust firms have lent more than 5 billion yuan (US$824,6 million) to a delinquent coal company, raising the prospect of further defaults in China’s so-called shadow banking system.

Reuters

In addition, investors in a trust product already in default have pledged to seek repayment not only from the trust firm itself, but also from China Construction Bank (CCB) (601939.SS) (0939.HK), the country’s second-largest lender, which acted as sales agent for the high-yield investment products issued by Jilin Province Trust Co Ltd.
Analysts have warned of moral hazard caused by the widespread assumption among Chinese savers that even high-yielding investments carry implicit guarantees from state-owned banks.

If a major default occurs, it could spark a panic in which investors abruptly stop buying such products, leading to bankruptcies among weak corporate borrowers who rely on non-bank financing to maintain their operations.

Jilin Trust has already failed to pay off 763 million yuan in maturing high-yield investments it sold to wealthy clients of CCB, state media reported. The products were based on loans to struggling coal firm Shanxi Liansheng Energy Co Ltd.

But exposure to Liansheng extends far beyond Jilin Trust, the official China Securities News reported on Friday. Chang’an International Trust Shareholding Co Ltd sold 1,2 billion yuan in products linked to Liansheng affiliates last March that mature in the coming weeks, according to disclosures on Chang’an Trust’s website.

The paper did not name the other trust companies that lent to Liansheng, but reported that six trust firms have 5 billion yuan in exposure, citing an unnamed source.

A court in central China’s coal-rich Shanxi province said last year that Liansheng had 30 billion yuan in outstanding debt of all types and had applied for debt restructuring.

Investors in the Jilin Trust product are demanding that CCB also take responsibility for compensating investors, 21st Century Business Herald reported.